Statement On 3rd Quarterly California Cap-And-Trade Auction

The California Air Resources Board (CARB) will release results of the state cap-and-trade program’s third quarterly auction of carbon allowances for 2017 on August 22nd. This is the first auction held since the program was extended through 2030 by a two-thirds legislative supermajority in July. This statement forecasts allocation demand, supply, prices, and revenue; and it can be attributed to Director of Research Chris Busch.

Third quarterly California carbon market auction of 2017 to completely sell out of allowances at highest price in four years, but additional allowance sales threaten state’s ambitious 2030 emissions reduction goal 

“We strongly expect this auction to sell 100 percent of current vintage allowances (or be ‘fully subscribed,’ in market terminology) for the second auction in a row, and to result in the highest auction settlement price in at least four years – above the $13.88 per ton clearing price in May’s auction. Secondary carbon market prices, which have reliably predicted auction demand, peaked at $15.45 on July 18th and were at $14.83 on August 15th when the auction was held.  We expect the recent auction settled at $14 per ton or higher, which would be the highest auction price since July 2013.”

“Beyond this auction, we are bullish on market demand and expect all future carbon market auctions will completely sell out between now and 2020, generating at least $1.3 billion in additional auction revenue for the Greenhouse Gas Reduction Fund (GGRF), as a result of passing AB 398 and AB 617.  However, this is not because allowance oversupply has been resolved.  Though AB 398 requires CARB to track this issue and make future adjustments, emitters and speculators are likely to snap up allowances at relatively low prices over the next few years given the need to comply with the aggressive 2030 cap.”

“The California market auction’s price floor previously held back 180 million metric tons (MMT) of allowances.  CARB’s previously signaled intentions to change how the price floor functions by sending unsold allowances to a reserve after two years was formalized in AB398, effectively reducing supply unless prices spike.”

“While the return to steady auction sales will be cheered by policymakers, higher sales are not an unadulterated good news story.  Additional allowances purchased by polluters at auction could equal more emissions, potentially meaning California will lag behind the necessary ramping up of emission reductions needed to meet its 40% reduction by 2030 goal.  The last set of inventory results for state greenhouse gas emissions returned the weakest reductions since 2007. We recommend that CARB address oversupply sooner than later so that cap-and-trade can play a stronger role in reducing emissions.”